LONDON (Reuters) – Investors can’t seem to buy enough German government bonds and yet the cost of insuring against a German default has slowly crept up.

It might seem counterintuitive that the two phenomena are occurring at the same time but they have a common driving force – growing concern the euro zone crisis has worsened so much that Greece could end up leaving the single currency.

Given European officials are publicly discussing the risk of an event they once said was unthinkable, German bonds are viewed as the safest option in the euro zone and are finding ready buyers even though yields have fallen to record lows.

But while investors prefer to hold German government bonds rather than ones issued by pretty much any other euro zone country, financial markets are also assessing what Germany stands to lose as the crisis deepens.

Their assessment is reflected in the credit default swap (CDS) market, where the cost of insuring against a German government default has risen, albeit from low levels, to its highest since mid-January.

“If there is a Greek exit, the credit metrics of all the euro zone sovereigns would come under pressure,” Jeroen van den Broek, head of credit strategy at ING in Amsterdam, said.

“This includes the credit metrics of Germany, which would deteriorate if there were a change in the euro zone dynamics to that extent.”

LONDON, March 16 (Reuters) – Investors looking through the fog of French election campaign rhetoric see enough differences between the two main presidential contenders to care who wins.

Protectionism, potshots at European Union rules and promises to raise taxes on the rich are as much a part of the platform of conservative incumbent Nicolas Sarkozy as his Socialist rival Francois Hollande.

While this is the norm for French election campaigns, some of the pledges being bandied around matter to financial markets.

Most notably, Hollande has said he wants to amend a European fiscal discipline pact on which the ink is barely dry, and which Germany views as the quid pro quo for a European “firewall” that will be vital if the debt crisis flares up again.

And some of Hollande’s domestic policy pledges, such as his plan to reverse an increase in the pension age for those who have worked since the age of 18, are being viewed as a signal that fiscal and economic reforms would be implemented even more slowly under Hollande than they were under Sarkozy.

“The French election matters more than it usually does,” Giordano Lombardo, group chief investment officer at Pioneer Investments, which has 180 billion euros ($235.3 billion) under management, said.

“You must distinguish between political campaigning and actual policies and therefore be cautious of bold statements during political campaigns. But the market has been a bit complacent and this (election) is worthy of attention.”

LONDON (Reuters) – A slump in Portuguese bond prices in the past month shows there are parts of the euro zone government debt market that massive shots of cheap money from the European Central Bank cannot reach.

Italian, Spanish and Irish bonds have all rallied as banks used some of the 489 billion euros they borrowed from the ECB in December to buy such debt, a profitable trade because the special three-year loans were so cheap.

But this cash has not helped Portugal, whose borrowing costs recently rose to levels that could eventually force it to seek a second international bailout or even a debt restructuring.

“It doesn’t work for Portugal because, for it to work, people need to be persuaded that the economy and the debt (situation) are sustainable,” said Bill Blain, senior director at Newedge.

“Investors are being pragmatic. They are looking at the sustainability of Portuguese debt and saying there will have to be a restructuring. They are more confident about buying Spain and Italy because these are big bond markets where banks are piling in surplus liquidity.”

LOOKING AFTER NUMBER ONE

The conditions of the bailout Portugal received from the International Monetary Fund and European Union last year also help explain why the country’s own banks aren’t ploughing ECB loans into the government bond market.

LONDON, Feb 1 (Reuters) – A slump in Portuguese bond prices in the past month shows there are parts of the euro zone government debt market that massive shots of cheap money from the European Central Bank cannot reach.

Italian, Spanish and Irish bonds have all rallied as banks used some of the 489 billion euros they borrowed from the ECB in December to buy such debt, a profitable trade because the special three-year loans were so cheap.

But this cash has not helped Portugal, whose borrowing costs recently rose to levels that could eventually force it to seek a second international bailout or even a debt restructuring.

“It doesn’t work for Portugal because, for it to work, people need to be persuaded that the economy and the debt

(situation) are sustainable,” said Bill Blain, senior director at Newedge.

“Investors are being pragmatic. They are looking at the sustainability of Portuguese debt and saying there will have to be a restructuring. They are more confident about buying Spain and Italy because these are big bond markets where banks are piling in surplus liquidity.”

LOOKING AFTER NUMBER ONE

LONDON (Reuters) – German bonds have so far been viewed as the last bastion of safety in the euro zone sovereign debt markets but some prices are beginning to suggest their allure will not be eternal.

A relentless rise in southern European countries’ borrowing costs and the hefty premium they pay over Germany overshadowed an unusual development this week — German yields rose as the euro zone crisis sucked in France and the Netherlands, rather than falling as they did when Italy fell victim.

The yield premium that investors demand to hold 10-year U.S. or UK bonds rather than German debt has shrunk sharply in the past few days as a result, highlighting investors’ preference at this point for debt issued by these large non-euro zone countries.

Moreover, while the cost of insuring against an Italian or French default has risen markedly in the past week, the biggest daily percentage rise in the cost of such insurance on Thursday was actually in Germany rather than France or Italy.

“Germany is still the best of a bad job in the euro zone and out of all the members, it still represents the most credible safe haven, but Germany is not immune to this crisis,” said Simon Derrick at Bank of New York Mellon in London.

In fact, data on how the bank’s clients are moving their money around euro zone bond markets shows the most dramatic shift in investor behavior is related to Germany.

“We are seeing that demand has dissipated for German paper with maturities of one year or more,” Derrick said.

LONDON, Nov 18 (Reuters) – German bonds have so far been viewed as the last bastion of safety in the euro zone sovereign debt markets but some prices are beginning to suggest their allure will not be eternal.

A relentless rise in southern European countries’ borrowing costs and the hefty premium they pay over Germany overshadowed an unusual development this week — German yields rose as the euro zone crisis sucked in France and the Netherlands, rather than falling as they did when Italy fell victim.

The yield premium that investors demand to hold 10-year U.S. or UK bonds rather than German debt has shrunk sharply in the past few days as a result, highlighting investors’ preference at this point for debt issued by these large non-euro zone countries.

Moreover, while the cost of insuring against an Italian or French default has risen markedly in the past week, the biggest daily percentage rise in the cost of such insurance on Thursday was actually in Germany rather than France or Italy.

“Germany is still the best of a bad job in the euro zone and out of all the members, it still represents the most credible safe haven, but Germany is not immune to this crisis,” said Simon Derrick at Bank of New York Mellon in London.

In fact, data on how the bank’s clients are moving their money around euro zone bond markets shows the most dramatic shift in investor behaviour is related to Germany.

“We are seeing that demand has dissipated for German paper with maturities of one year or more,” Derrick said.

LONDON (Reuters) – Life is not easy for the financial market traders who are making things so hard for euro zone policymakers.

There are no pumped-up traders cheering from their screens as Italy’s bond yields rise or as France gets sucked into a debt crisis which has already forced Greece, Ireland, and Portugal to seek international bailouts. The mood is weary and fraught.

Bond traders see their own business throttled off by the same market forces that squeeze Italy’s public finances and stir speculation about France’s triple-A credit rating.

“Things have felt almost as bad as it was back during the Lehman days in terms of liquidity – it is increasingly hard to get any business done and, to be honest, we think it is going to get worse,” a London-based bond trader said.

“Two-way markets have gone, the size of business you can get done at these bid/offer rates is minimal, bonuses and jobs are being cut. It’s depressing and what is worse, there is no guarantee that anything is going to be better next year.”

Talk to fund managers and it is easy to see why a debt crisis which has mutated into an existential crisis for the euro is not translated into a bonanza for traders.

“What if the currency union falls apart? Our premise is that it doesn’t happen. (But) if you think that is going to happen, don’t buy equities. Don’t buy anything. Just go and hide,” a London fund manager running money for institutional investors said.

By Swaha Pattanaik

(Reuters) – Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.

1/ THINKING OUTSIDE THE BOX

European dominoes are falling quickly, with Italian bond yields in the past week entering territory that has previously triggered bailout requests from Greek, Ireland and Portugal. Financial markets are keenly aware that there isn’t enough money in the coffers to bail Italy out and are wondering how many euro zone taboos are about to be broken (euro bonds, ECB printing money, one or more country leaving the euro, euro break-up). The problem for traders and investors is how to price financial assets given the existential angst gripping the region. Conventional models of determining value or potential entry/exit points for positions will be less use as a compass if the single currency paradigm is about to change. Moreover, financial-system stresses threaten to become even more pronounced and will heighten pressure on policymakers – and especially central bankers — to act. The more radical the solutions under consideration, the harder it will be to come up with easy answers to where markets will or should be trading.

2/ PLAGUED BY PROBLEMS

The fixed income and credit markets are flagging a high degree of investor concern about the euro zone’s ability to deal with the crisis engulfing its third biggest member. Without more aggressive ECB intervention in the secondary bond market, Italy’s auction in the coming week could prove difficult and lead to pressure on the authorities to accept IMF help. An apparently inexorable rise in Italian yields is also likely to trigger more margin calls from clearing houses, leaving whoever succeeds Prime Minister Silvio Berlusconi little time to convince markets of Rome’s commitment to implement reforms. As if that were not enough, investors are also wary of potential downgrades from ratings agencies if politics snarls up the business of bringing down budget deficits. And while Italian yield moves may have marked an escalation in the crisis, it is increasingly French bond and CDS prices which are coming under scrutiny as they start to behave a bit more like the periphery than the core sovereign debt they were once deemed.

3/ STRESSES AND STRAINS

LONDON (Reuters) – German travel group TUI AG is going where the world’s biggest financial firms have yet to venture.

It has decided to protect itself from the risk that Greece could leave the euro zone by asking Greek hoteliers to sign new contracts which would apply if this were to happen.

While other companies have thought about how to deal with the ramifications of what, until recently, was dismissed as a virtual impossibility by politicians and European Union bureaucrats, few have taken steps to protect themselves.

Even now, after Germany and France have raised the possibility of a country leaving the euro, most European firms are unwilling to talk publicly about their strategy in the event of the exit of one country or a break-up.

“We have discussed it at board meetings. But each time we have reached the same point and had to stop. There’s no mechanism for an exit,” the head of one large pan-European construction company told Reuters.

Investment bankers say they have run their own models for what might happen if the euro zone disintegrated.

And a senior banker at one major U.S. firm said it had taken the decision to cut all its own euro positions down to a minimum to reduce the risks, highlighting derivative positions as potentially the most problematic in the event of a break-up of the single currency bloc.

LONDON, Nov 10 (Reuters) – German travel group TUI AG is going where the world’s biggest financial firms have yet to venture.

It has decided to protect itself from the risk that Greece could leave the euro zone by asking Greek hoteliers to sign new contracts which would apply if this were to happen.

While other companies have thought about how to deal with the ramifications of what, until recently, was dismissed as a virtual impossibility by politicians and European Union bureaucrats, few have taken steps to protect themselves.

Even now, after Germany and France have raised the possibility of a country leaving the euro, most European firms are unwilling to talk publicly about their strategy in the event of the exit of one country or a break-up.

“We have discussed it at board meetings. But each time we have reached the same point and had to stop. There’s no mechanism for an exit,” the head of one large pan-European construction company told Reuters.

Investment bankers say they have run their own models for what might happen if the euro zone disintegrated.

And a senior banker at one major U.S. firm said it had taken the decision to cut all its own euro positions down to a minimum to reduce the risks, highlighting derivative positions as potentially the most problematic in the event of a break-up of the single currency bloc.